Buyout Profits Keep Flowing to Romney

Mitt Romney speaking last month at the port of Tampa in Florida. A spokeswoman for his presidential campaign called his retirement agreement with Bain Capital “a typical market deal.”Credit
Chip Litherland for The New York Times

Almost 13 years ago, Mitt Romney left Bain Capital, the successful private equity firm he had helped start, and moved to Utah to rescue the Salt Lake City Olympic Games and begin a second career in public life.

Yet when it came to his considerable personal wealth, Mr. Romney never really left Bain.

In what would be the final deal of his private equity career, he negotiated a retirement agreement with his former partners that has paid him a share of Bain’s profits ever since, bringing the Romney family millions of dollars in income each year and bolstering the fortune that has helped finance Mr. Romney’s political aspirations.

The arrangement allowed Mr. Romney to pursue his career in public life while enjoying much of the financial upside of being a Bain partner as the company grew into a global investing behemoth.

In the process, Bain continued to buy and restructure companies, potentially leaving Mr. Romney exposed to further criticism that he has grown wealthier over the last decade partly as a result of layoffs. Moreover, much of his income from the arrangement has probably qualified for a lower tax rate than ordinary income under a tax provision favorable to hedge fund and private equity managers, which has become a point of contention in the battle over economic inequality.

An examination of Mr. Romney’s public financial disclosures, as well as interviews with former Bain partners, business associates and counselors to his campaign, reveals the extent of his financial relationship with Bain Capital and how it has allowed him to continue amassing a personal fortune while building a political career.

Though Mr. Romney left Bain in early 1999, he received a share of the corporate buyout and investment profits enjoyed by partners from all Bain deals through February 2009: four global buyout funds and 18 other funds, more than twice as many over all as Mr. Romney had a share of the year he left. He was also given the right to invest his own money alongside his former partners. Because some of the funds and deals covered by Mr. Romney’s agreement will not fully wind down for several years, Mr. Romney is still entitled to a share of some of Bain’s profits.

During his political career, Mr. Romney has promoted his experience as a businessman while deflecting criticism of layoffs caused by private equity deals by noting that he left Bain in 1999. But records and interviews show that in the years since, he has benefited from at least a few Bain deals that resulted in upheaval for companies, workers and communities.

One lucrative deal for Bain involved KB Toys, a company based in Pittsfield, Mass., which one of the firm’s partnerships bought in 2000. Three years later, when Mr. Romney was the governor of Massachusetts, the company began closing stores and laying off thousands of employees. More recently, Bain helped lead the private equity purchase of Clear Channel Communications, the nation’s largest radio station operator, which resulted in the loss of 2,500 jobs.

Much information about Mr. Romney’s wealth is not known publicly. Federal law does not obligate him to disclose the precise details of his investments. He has declined to release his tax returns, and his campaign last week refused to say what tax rate he paid on his Bain earnings.

But since Mr. Romney’s payouts from Bain have come partly from the firm’s share of profits on its customers’ investments, that income probably qualifies for the 15 percent tax rate reserved for capital gains, rather than the 35 percent that wealthy taxpayers pay on ordinary income. The Internal Revenue Service allows investment managers to pay the lower rate on the share of profits, known in the industry as “carried interest,” that they receive for running funds for investors.

“These are options that are not available to the ordinary taxpayer,” said Victor Fleischer, a law professor at the University of Colorado who studies financial firms. “You continue to take your carried interest — a return on labor, not capital invested — and you’re paying 15 percent on it instead of high marginal income rates.”

Mr. Romney is among the wealthiest candidates ever to run for president, with a family fortune that his campaign has estimated at $190 million to $250 million. In the years since he left Bain, much of his wealth has migrated into investments outside the company or into family trusts, including an additional $100 million set aside for his five sons.

But the family’s Bain holdings are still considerable: in his 2011 disclosure, Mr. Romney reported Bain assets between $12.4 million and $60.9 million, which provided between $1.5 million and $9.3 million in income. The blind trust for his wife, Ann, held at least another $10 million, generating income of at least $4.1 million. Because the campaign is required to provide only a minimum value for some Bain assets now held by Mrs. Romney, the total could be far more.

A spokesman for Bain declined to comment on the specifics of the arrangement, citing confidentiality agreements with Mr. Romney.

Andrea Saul, a spokeswoman for Mr. Romney, said, “This was a typical market deal. Bain Capital has no incentive to overpay Governor Romney, and they didn’t.”

While other private equity firms have granted departing founders and senior executives a share of carried interest, also known as “carry,” Mr. Romney’s retirement deal appears unusual for its length and the number of future funds it covered.

“Ten years ago, I would have said receiving carry on two successor funds would be considered fairly normal,” said Cédric Teissier, a partner and general counsel at Triago, which raises money for private equity firms. Mr. Teissier said an arrangement like Mr. Romney’s “would probably be on the extravagant side.”

Other executives contended that the deal did not make Mr. Romney nearly as wealthy as his peers in private equity who took their firms public.

Profitable Percentages

While Mr. Romney is often described as a founder of Bain Capital, it originally grew out of another business: the management consulting firm Bain & Company, which spun off the private equity arm in 1984.

It was early in the leveraged buyout era, when sharp-elbowed Wall Street dealmakers like Henry R. Kravis, Stephen A. Schwarzman and Peter G. Peterson were starting private equity firms that raised money from investors — university endowments and state pension funds — and combined it with enormous amounts of debt to buy companies.

Bain & Company’s patriarch, Bill Bain, persuaded Mr. Romney, one of his rising stars, and several other young Bain consultants to run Bain’s new private equity operation. The majority of the $37 million raised for Bain Capital’s first fund came from Bain & Company.

Small early deals, like a $2 million investment in an office supply store that would become Staples, proved successful. Bain’s funds — and deals — grew quickly, with acquisitions like Domino’s Pizza and the Sealy mattress company.

About every three years, the firm raised a new buyout fund, each doing business for about a decade: buying companies, restructuring and streamlining them, and then selling them, usually for a profit. In the early 1990s, the firm formed a new management entity, Bain Capital Inc. Mr. Romney was given full ownership, although it is not clear how much of his own money he invested.

Private equity firms typically act as the general partner for each fund they create. The firms collect an annual management fee equal to 2 percent of the fund during the period it is buying and restructuring companies. When companies are resold, the firm’s partners also split a percentage of the profits. Bain’s returns were so good, averaging 88 percent annually through the late 1990s, that it began taking 30 percent of the profits instead of the traditional 20 percent.

Former Bain officials say that when Mr. Romney ran the firm, he motivated colleagues by spreading profits widely and keeping a smaller percentage, often in the single digits, for himself. He and his co-workers also invested their own money in most of the deals to increase their personal returns.

Eventually, Mr. Romney turned his sights beyond the business world. In February 1999, he left Bain to help turn around the troubled organization of the 2002 Winter Olympic Games. In 2001, Mr. Romney announced that he had formally transferred his ownership of Bain Capital Inc. to other partners.

But behind the scenes, Mr. Romney had negotiated his retirement agreement. Although he would no longer be a partner, he would continue to be paid a part of the firm’s profits in buyout deals and other businesses, much as active partners were. The agreement would cover any new fund or venture started by his former partners until February 2009, although his stake would decline with each successive fund.

Photo

Partners at Bain Capital including Mr. Romney, center, played with $10 and $20 bills after posing for a photo for a company brochure.Credit
Bain Capital

He and his wife also would be permitted to invest their own money in co-investment vehicles typically reserved for Bain executives.

While some former business associates said they considered the deal generous, others said Mr. Romney might have gotten even more from Bain had he not wanted a quick move into public life.

“He made a very sweet deal, he had a very good exit,” said one former Bain partner, who requested anonymity because of confidentiality agreements. “But my guess is, given the actual economic value of Bain Capital at the time, Mitt walked away with less than he could have if he did not take into account the adverse publicity and attention that a battle with former partners would have caused if he had negotiated and played hardball.”

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Some specifics of Mr. Romney’s holdings were revealed when, fresh off his successful stint running the Games, he entered the 2002 campaign for Massachusetts governor.

A disclosure form filed with the Massachusetts Ethics Commission, detailing the Romneys’ finances for the previous year, reported stakes ranging from 2.1 percent to 16.5 percent of the firm’s share of the profits in several Bain funds created before Mr. Romney left.

After taking office in 2003, Mr. Romney moved the bulk of his assets into two blind trusts, according to his Massachusetts financial disclosures. Today, many of the family’s Bain assets appear to be held in Mrs. Romney’s blind trust.

The 1999 retirement deal turned out to have a huge upside that few could have predicted: the golden age of private equity was just around the corner.

A Share of Huge Growth

Like the giants of the business, KKR and Blackstone, Bain’s business ballooned in the years after Mr. Romney left. Private equity firms, armed with megafunds and cheap and easy Wall Street financing, set their sights on acquiring big brand-name companies. Bain formed a venture capital arm, spun off affiliates to pursue private equity investments in Europe and Asia and expanded Sankaty Advisors, an affiliate that makes investments in debt securities.

Mr. Romney’s campaign declined to specify his share in the Bain funds started after he left. But even as his share of profits declined over time, the size of those funds was growing enormously.

In 1999, Bain had about $4 billion in assets under management, 100 or so employees and a single office, in Boston. In 2005, Bain had over $21 billion in its funds. Today, Bain manages about $66 billion over all, with 900 employees and 10 offices in 6 countries.

By giving Mr. Romney a stake in funds after his departure, Bain’s partners effectively compensated him for his founding interest in the firm without having to write him a large check or taking Bain public, which would have allowed Mr. Romney to continue holding equity in the firm or cash out by selling his shares on the public market.

“One of the benefits of going public is that the founding generation of leaders can monetize their ownership stakes in their firms,” said Scott M. Sperling, a co-president of the private equity firm Thomas H. Lee Partners. “Bain has decided to remain a private partnership and chosen a different way to compensate its founder, which is not unusual.”

While Bain’s deals typically yielded enormous profits for its investors and partners, several have led to serious financial problems — and sizable layoffs — at companies it acquired.

The 2000 purchase of KB Toys, then one of the country’s largest toy retailers, became one of the most contentious.

As in most Bain deals, the partnership put up a small fraction of the money — in this case $18 million — and borrowed the rest of the $302 million purchase price. Just 16 months later, the toy company borrowed more to pay Bain and its investors an $85 million dividend.

That gave Mr. Romney and the other partners a quick 370 percent return on their money. But it also left the toy company with a heavy debt burden. Before long, the company began closing stores around the country and laid off 3,400 workers. It filed for bankruptcy protection in 2004.

Two more recent deals have also led to spiraling debt loads and layoffs. Since Bain and another private equity firm led a buyout in 2008 of Clear Channel Communications, the company has struggled under nearly $20 billion in debt and has cut 2,500 jobs.

Sensata Technologies, a European company that makes sensors and controls used by the auto and aerospace industries, prospered after a Bain-led buyout in 2006, but the firm also laid off several hundred American workers. Most of the jobs were moved overseas, and the federal Labor Department spent at least $780,000 to retrain some people who lost their jobs.

While difficult competitive and economic conditions have contributed to those companies’ problems, Democrats have already made layoffs at Bain companies during Mr. Romney’s tenure at the firm a centerpiece of their attacks on him. Americans United for Change, an independent group backed by organized labor, has begun an ad campaign comparing Mr. Romney to Gordon Gekko, the marauding buyout king portrayed in the movie “Wall Street.”

“Bain Capital is proud of the work our employees and management teams do to build growing businesses and deliver superior returns for our investors,” said Alex Stanton, a Bain spokesman. “Mitt Romney has had no involvement with the management of the firm or any of our investments since February 1999. We understand some may question our record for political purposes, but our focus remains on building great companies and improving their operations.”

Mr. Romney has expressed regret for lost jobs while defending the work of private equity firms in creating efficient and successful companies.

“In each case, we tried to grow an enterprise and, in doing so, hopefully provide a better future for those associated with that enterprise,” Mr. Romney said in an interview Sunday on Fox News Channel.

Tax Benefits

Tax treatment of hedge fund and private equity compensation has been another point of political contention. The debate in Washington boils down to whether the “sweat equity” provided by investment managers in putting deals together should entitle them to the special 15 percent tax rate on long-term capital gains, as opposed to the rates of up to 35 percent that normally apply to people providing services.

The lower rate had traditionally been reserved for investors who put their own capital at risk, but I.R.S. rulings in the early 1990s extended it to the share of profits paid to private equity and hedge fund managers. Democrats in Congress have periodically sought to rescind that privilege, and the Obama administration is considering another push to change that provision.

Mr. Romney’s retirement deal, like that of other private equity managers who keep a portion of their firms’ profits when they retire, could give him the lower rate on profits from deals he had nothing to do with.

“The rationale for having a capital gains preference is to encourage investors to put their cash into investments,” said Mr. Fleischer, the University of Colorado law professor. “Romney here isn’t even putting in any labor.”

Much remains unknown about the Romneys’ remaining holdings in Bain. Federal law does not require candidates to report underlying assets held by hedge funds or private equity firms in which they are invested, since the firms typically do not provide that information to their investors. Moreover, many of the family’s Bain assets reside in Mrs. Romney’s blind trust, which has looser disclosure requirements.

Much of that uncertainty would evaporate if Mr. Romney was elected: federal officeholders are not permitted to hold such private equity and hedge fund investments. If elected, Mr. Romney would most likely have to unwind his stakes in all Bain funds.

Peter Lattman and Kitty Bennett contributed reporting.

A version of this article appears in print on December 19, 2011, on Page A1 of the New York edition with the headline: Buyout Profits Keep Flowing to Romney. Order Reprints|Today's Paper|Subscribe